SEI Investments Company — 2020 Second-Quarter Form 10-Q Summary
Business context and reporting period
SEI provides technology-driven investment processing, investment operations and investment management platforms to wealth managers, financial institutions, advisors, investment managers, institutional investors and ultra-high-net-worth families. The unaudited filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. As of June 30, 2020, SEI managed, advised or administered approximately $1.0 trillion of assets, including $317.8 billion under management and $692.5 billion under administration.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $400.6 million | $409.6 million | $815.4 million | $810.4 million |
| Income from operations | $100.3 million | $120.1 million | $210.5 million | $223.7 million |
| Net income | $101.1 million | $126.5 million | $210.3 million | $240.5 million |
| Diluted EPS | $0.68 | $0.82 | $1.39 | $1.54 |
| Operating margin | 25.0% | 29.3% | 25.8% | 27.6% |
| Net margin | 25.2% | 30.9% | 25.8% | 29.7% |
| Operating cash flow | Not separately provided | Not separately provided | $264.1 million | $217.6 million |
Asset management, administration and distribution fees were $320.6 million in Q2 and $652.4 million for the first six months. Information processing and software servicing fees were $80.1 million in Q2 and $163.0 million year to date. Equity in earnings from unconsolidated affiliate LSV Asset Management was $28.3 million in Q2 and $58.2 million year to date.
At June 30, 2020, cash and cash equivalents were $758.3 million, or $761.4 million including restricted cash. Total assets were $2.05 billion and shareholders’ equity was $1.71 billion. The filing does not report outstanding borrowings under the credit facility. SEI had $11.6 million of letters of credit outstanding and $288.4 million of borrowing capacity available under its $300 million facility, which expires in June 2021. The company was in compliance with all covenants.
Capital allocation included $219.4 million of share repurchases and $103.9 million of dividends paid during the first six months. The company declared a quarterly dividend of $0.35 per share and had approximately $150.6 million of repurchase authorization remaining at June 30.
Material changes versus the prior comparable period
- Q2 revenue declined 2%, operating income declined 17%, net income declined 20% and diluted EPS declined 17%.
- For the first six months, revenue increased 1%, while operating income declined 6%, net income declined 13% and diluted EPS declined 10%.
- Operating expenses increased 4% in Q2 and 3% year to date. Consulting, outsourcing and professional fees increased materially, while travel and promotional expenses declined because of COVID-19 restrictions.
- Investment Managers was the strongest segment, with revenue increasing 9% in Q2 and 10% year to date; its six-month operating profit increased 14%.
- Private Banks revenue declined 7% in Q2 and 6% year to date, primarily because of client losses, lower non-recurring fees and weaker international client activity. Six-month operating profit declined 84%.
- Investment Advisors revenue declined 6% in Q2 but increased 1% year to date. Institutional Investors revenue declined 6% in Q2 and 3% year to date.
- Investments in New Businesses generated a $10.1 million Q2 operating loss and a $17.6 million six-month operating loss, compared with losses of $3.7 million and $6.6 million, respectively, in 2019.
- LSV’s revenue declined 23% in Q2 and 20% year to date; SEI’s share of LSV earnings declined 25% and 23%, respectively.
- Average client assets under administration increased 11% year to date to $676.0 billion, but average assets under management declined 4% to $316.2 billion. LSV average assets under management declined 19% to $84.2 billion.
Guidance, outlook, risks and unusual items
No quantitative earnings or revenue guidance was provided. Management stated that operating cash flow, existing cash and available borrowing capacity should fund operations, investment in products and equipment, share repurchases, headquarters expansion and dividends.
- COVID-19 market volatility reduced asset-based fee revenue, shifted client assets toward lower-margin liquidity products and negatively affected earnings. SEI reported that nearly its entire workforce was working remotely and that remote capabilities had remained effective.
- A May 17, 2020 ransomware attack at third-party developer M.J. Brunner resulted in access to certain client data. SEI stated that its network and operations were not compromised; related second- and third-quarter costs were not expected to be material.
- A July 1, 2020 third-party storage-array failure materially limited platform transactions on July 1 and 2. Systems were subsequently restored. SEI expects additional third-quarter costs and further investments in technology and operational resiliency, but could not yet estimate the total amount.
- SEI faces seven Louisiana lawsuits related to Stanford Trust Company. Key claims were dismissed in two principal proceedings, but appeals remain pending. The company cannot reasonably estimate a potential loss.
- SEI’s subsidiary filed the SS&C Advent contract dispute in February 2020. SEI expects no near-term service disruption and considers litigation costs immaterial, but the matter could continue for several years.
- Other risks include capital-market volatility, third-party service-provider failures, cybersecurity and operational risks, regulatory scrutiny, litigation, pricing pressure, LSV performance, foreign exchange and interest-rate movements, and dependence on client asset levels.
- Stock-based compensation expense increased to $14.0 million from $10.1 million in the first six months. Future expense may be volatile because vesting depends on financial performance targets.
- The company adopted credit-loss and goodwill accounting standards in 2020 without a material impact. It expects to adopt ASU 2019-12 on income taxes beginning in the first quarter of 2021 and is evaluating the impact.
Most important facts for investors to verify
- Whether COVID-19-related market conditions, client flows and shifts into liquidity products continue to pressure asset-based fees and margins.
- The sustainability of growth in Investment Managers and client assets under administration, compared with declines in traditional assets under management and LSV results.
- The July technology outage, the scope of the third-party cybersecurity incident and any resulting remediation costs, client effects or regulatory consequences.
- The status and potential exposure of the Stanford litigation and the SS&C Advent dispute, for which loss estimates are unavailable or uncertain.
- The June 2021 expiration and refinancing or renewal terms of the $300 million credit facility, including the effect of LIBOR replacement.
- Capital allocation priorities, including continued repurchases, the $0.35 quarterly dividend and remaining repurchase authorization.